The Gloom Around Greece Is Dissipating

By HUGO DIXON | REUTERS

April 21, 2013

Greece is not yet out of the woods. But there is a credible path that could lead the country back into the sunlight.

Although the economy will have a terrible 2013, next year should be better. But the outlook is fragile: political crisis could yet again break out, tax evasion is rife, and there is the risk of external shocks.

Look first at the good news. Antonis Samaras’s coalition government has held together surprisingly well since it gained power last June after a period of political chaos, despite pushing through extremely unpopular measures.

Mr. Samaras’s center-right New Democracy party is neck and neck in the opinion polls with the radical left Syriza, the main opposition party. Samaras has not suffered from plunging support, as have Mariano Rajoy of Spain and François Hollande of France.

Largely as a result of Mr. Samaras’s effective government, the troika — the European Commission, the International Monetary Fund and the European Central Bank — gave Greece a thumbs-up last week in its latest progress report. More bailout funds, which so far total about €200 billion, or about $260 billion, will be disbursed.

The trauma of last year, when it looked as if Greece might quit the euro, and the ongoing austerity will cause the economy to shrink another 5 percent or so this year, taking the cumulative decline to about 25 percent. Unemployment will probably rise to about 30 percent.

Those are grim figures. But Athens now seems on course to achieve “primary balance” this year. In other words, it will not have a budget deficit before interest payments. That means it probably will not have to implement another round of austerity next year, so the economy will not be struggling against that obstacle.

Meanwhile, as much as €50 billion in bailout cash is being used to recapitalize viable banks and shut down nonviable ones. The money is meant to fill a hole left by the steep losses on government debt holdings and the avalanche of bad private sector loans. It is tragic that this operation was not completed at the start of the crisis, as the zombie banking system has exacerbated the slump. Still, better late than never.

The banks’ dependence on expensive emergency liquidity assistance from the Greek central bank has also been slashed. It is now €22 billion, down from a peak of about €120 billion. Banks’ funding costs have fallen, theoretically allowing them to pass the benefit to clients.

Another €8.2 billion in bailout cash is being used to pay the government’s bills.

Again, it is terrible this was not done earlier. The government’s failure to pay its bills has crushed many businesses. But again, if the money is disbursed rapidly, the private sector will get a breather.

The drive to improve competitiveness, mainly through much lower wage costs, is finally bearing fruit, too. This is most visible in tourism, which accounts for 17 percent of gross domestic product. Revenues are expected to jump 9 percent to 10 percent this year, according to the industry.

If Athens can hold the course, there is a good chance that the euro zone will agree further to lighten its debt load, which amounts to about 160 percent of G.D.P., by cutting the interest rate and lengthening the maturities of official loans. This was explicitly mentioned in the latest troika report. Debt relief would allow Athens to avoid further fiscal tightening.

However, the political situation remains fragile. Even if the coalition hangs together, elections will probably be called by early 2015 at the latest. This is because Greece needs to choose a new president and the Constitution specifies that if a supermajority of members of Parliament cannot agree on a candidate — which seems likely — a general election must be called.

Many observers think Mr. Samaras could be tempted to call an even earlier election, especially if he thinks he can win. But such a gamble could backfire. Meanwhile, a Syriza-led government could lead to renewed friction with the troika and a decline in business confidence.

While Athens is hitting its deficit targets, this is because spending is below target. Revenues are also below target, a consequence of the continued failure to crack down on tax evasion. Doing so is vital for many reasons, not the least of which is so that taxes on honest citizens do not have to be raised further.

More generally, Mr. Samaras does not seem to be doing enough to combat oligopolistic practices — perhaps because his party is closely associated with some of the country’s oligarchs. The troika should make it clear that freeing up markets is essential for Greece’s competitiveness and progress on this front will be a key factor in determining whether to provide further debt relief.

Finally, there is the risk of external shocks. Athens has so far largely dodged the bullet from Cyprus, after Cypriot banks’ branches in Greece were ring-fenced from the deposit haircuts in Nicosia. Even so, trade with Cyprus will plummet and the confidence of Greek depositors has been somewhat shaken.

The real danger would be if the Cyprus crisis deteriorated to such an extent that Nicosia quit the euro. Contagion to Greece would then be harder to avoid.

That said, the outlook for Greece looks far better than it has for years. The country will probably make it.